Question

Colin, a self-employed consultant, uses a room of his home as a business office. This room represents 10 percent of the home’s square footage. This year, Colin incurred the following expenses in connection with his home. Use Table 7-3 and Table 7-4.

Home mortgage interest $ 12,980

Property tax on residence 2,200

Homeowner’s insurance 1,475

Utilities 2,100

Furnace repairs 300

Colin purchased the home in 2000 for $225,000. For MACRS depreciation purposes, he allocated $185,000 to the building and $40,000 to the land.

If Colin’s gross business income exceeded his operating expenses by $75,000, compute his net profit for the year.

If Colin’s gross business income exceeded his operating expenses by $1,800, compute his net profit for the year.

Answer 1

(a) If Colin’s gross business income exceeded his operating expenses by $75,000:

We can calculate Colin's home (also business office) deduction as follows:

Particulars	Amount
Total Annual housing expenses	$19,055
Percentage of home's square footage used as office	10%
Expenses to be allocated to office	$1906
MACRS depreciation [10% of ($185,000/39 years]	$474
	$2,380

Net profit before allocation of home office deduction = $75,000

Less: Home office deduction (above) ($2,380)

Net Profit = $75,000 - $2,380 = $72,620

(b) If Colin’s gross business income exceeded his operating expenses by $1,800:

Net profit before allocation of home office deduction = $1,800

Less: Home office deduction (above) ($1,800)*

Net Profit = $1,800 - $1,800 = $0

* Home office deduction is limited to profit before deduction (i.e. $1,800)

Please up vote. Thanks!